Ford (F) Redesigns Business Model, Shifts to Build-to-Order System
Ford F is planning to shift its business model to an order-based system, wherein customers place order for a vehicle online from factory, and wait for six to eight weeks for their new car to be delivered to a dealer.
This approach marks a departure from the traditional way vehicles are sold by automakers and dealers in the United States, where buyers could simply pick a vehicle from rows of shiny metal and drive away from the dealership immediately in their new car, but is standard in Europe.
With the global economy gradually recovering from the wreckage caused by the pandemic, auto sales managed to rebound faster than anticipated. However, semiconductor makers have been unable to meet the surging demand for automotive semiconductors, and will take months to realign production to cater to this upswing in demand. This has caused a shortage of semiconductors in the auto sector and forced major auto biggies to halt or reduce production at several plants, thereby proving to be a speed-bump for automotive sales. Reportedly, the prevailing semiconductor chip shortage is expected to hit revenues from the global automotive industry to the tune of $110 billion in 2021.
Thus, one of the many ways in which the pandemic and accompanying supply shortages and need for custom cars have changed the face of the auto space is the advent of the trend of making mass-market vehicles nearly to order. Thus, automakers around the globe are re-imagining their business models and adopting this new approach of making vehicles to order.
Ford anticipates there are massive benefits associated with this build-to-order model of selling vehicles. Firstly, it would enable Ford to customize the vehicles per the needs of the customers, thus better meeting their requirements with respect to color, trim level, accessories, everything. Secondly, it will help reduce dealer and company inventory costs and better manage inventory production to match consumer demands. It would also help Ford deliver more vehicles that customers specifically want, while scrapping off the hard-to-sell models that pile up at dealerships and result in fat discounts that dent margins. Also, this model will enable the automaker to significantly cut other sales incentives.
While there are a number of potential advantages associated with this approach, Ford believes a major risk of this build-to-order model is that it might lose market share if buyers who are not willing to wait to get delivery of their new car, shop elsewhere. This is because customers always seek immediate satisfaction and are even willing to switch brands to get that.
The company is aiming to maintain a 50- to 60-day inventory supply, with inventories of pickup trucks and other best sellers a little higher. This means that nearly a quarter of Ford's sales would be build to orders compared to the nearly zero before the onset of the pandemic.
These changes are also projected to transform the decades-old car dealership model, which may ultimately serve as service centers rather than car depots and even as potential electric-vehicle charging stations in the future. Still, dealers will continue being the primary connection to customers as cars become more complicated and over-the-air updates and other features become even more important.
Apart from Ford, Volkswagen VWAGY is also moving toward a build-to-order model, while General Motors GM has optimized its inventories and is taking orders in some cases.
Well, treating the second largest purchase (after real-estate) same as shopping clothes online might seem a bit far-stretched right now but considering the changing dynamics of the auto industry, it seems online car buying will be the new normal in the United States in the upcoming time.
Ford, which shares space with Tesla TSLA in the same industry, currently carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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